Businesses Protest Proposed Indian Tax Plan

Would allow retroactive claims on foreign deals, cut tax avoidance

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A letter sent by seven overseas business groups that represent some 250,000 companies warned Prime Minister Manmohan Singh of India that a proposed taxation plan being considered by the Indian government is causing those companies to reconsider their presence in India.

Reuters reported Monday that the proposal, outlined in March in India's federal budget, would allow the government to claim taxes retroactively on overseas transactions and implement new measures designed to fight tax avoidance. The letter is the newest complaint by the international business community about the Indian government, which has not managed to pass economic reforms that would boost investment and restimulate growth.

The letter, dated March 29, was sent just days before a planned meeting between Finance Minister Pranab Mukherjee of India and George Osborne, chancellor of the Exchequer in the U.K., set to take place on Monday. Global investors have become wary of India over the last year after a number of financial missteps that included a failed try at bringing foreign supermarkets into the country and a protracted dispute with the steelmaker POSCO, based in South Korea, over a $12 billion plant.

In part, the letter to Singh said, "The sudden and unprecedented move ... has undermined confidence in the policies of the Government of India toward foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India. This is now prompting a widespread reconsideration of the costs and benefits of investing in India."

Trade groups that signed off on the letter included the U.S.-based Business Roundtable, the Confederation of British Industry, the Japan Foreign Trade Council and Canadian Manufacturers & Exporters.

Vodafone is just one of the companies embroiled in a long-running tax dispute with the Indian government, and in January emerged the victor from a Supreme Court decision there to dismiss a $2.2 billion tax demand from the government tied to Vodafone's acquisition of Hutchison Whampoa's Indian mobile assets in 2007.

Under the terms of the proposed law, tax laws that have been in place for half a century would be changed to allow the government to impose taxes retroactively on such business deals when the underlying asset is located in India, even if the deals were completed long ago. Other businesses that could be affected by the law are Telenor of Norway; Kraft Foods, which in 2010 acquired Cadbury's Indian business; AT&T, which sold Indian assets, and SABMiller, which purchased Foster's, including its Indian assets.

The letter warned, "There appears to be an assumption, often expressed by Indian tax authorities, that India's ability to attract foreign investment is not affected by its taxation policies and practices. This simply is not the case. India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world."

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